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Originally Posted by eribrav
This is completely incorrect and does not begin to realistically address what is going on in "subprime" lending.
There are a huge number of no-doc mortgages that have been handed out in the past 2 years. They are essentially ALL sub-prime and at high risk of default. They may have lowered the average creditworthiness of the pool of all borrowers, ,but the fact that a lot of garbage loans were added at the low end of creditworthiness does not mean that the definition of sub-prime gets revised downward.
Put another way, if banks stopped lending to "low risk" borrowers tomorrow, then ALL the loans after that would be subprime, not just the worst 49%.
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In 1950 you could not get a home loan unless you had 20% down. During other times in history the percentages were higher and in some cases mortgages where not available. The trending of "subprime" has occured over a long period of time.
It is true some firms have taken higher risks due to the recent real-estate boom. these firms will and have paid a price for the risk. However, the overall market is not supported by subprime loans. The overall market is supported by homeowners who have owned their homes for a long time and have equity. These people are not subject to short-term trends. Even if these people have re-financed or have used equity loans they still have net positive equity and would not be forced to sell on a short-term dip in the market.
I stand by my first post in this thread. The sub-prime definition was my way of illustrating how the term only has meaning in the "eye of the beholder". Given the worse case - what has happend in the subprime market? Some people who were renters became homeowners. Some people who were doing little or no investing bought some investment property. Given that - if they loose - their credit score goes down and the bank owns some real-estate that will be sold at below market prices. When that happens strong investors and strong buyers will benefit. Like the old saying - the rich will get richer.
So again, I ask for the economic guru who can explain what is going to happen to net demand for housing and how long-term, the market goes down. Everything else is just smoke and mirrors and a means to sell newspapers and TV ads.
P.S. Also - if you don't own stock in a subprime lender, didn't get a subprime loan and lost your ability to pay, don't own property in high risk areas what going to happen to you if the subprime market blows up - pretty much nothing. But you say there will be a chain reaction - but thats where you or the economic guru needs to make the link with long-term demand and supply and a short-term market correction. No one has done it yet, other than to say the sky is falling. Last time I checked Chicken Little is not a trained economist.